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Friday, September 29, 2017

Global Shale Law Compendium: Shale Law Governance in Mexico

Written
by Chloe Marie – Research Fellow

The Global Shale Law Compendium
series addresses legal development and other issues related to the governance
of shale oil and gas activities in various countries and regions of the world.
In this article, we will highlight governance actions taken by Mexico.

According
to the U.S. EIA, Mexico has
considerable potential for shale gas production with approximately 546 Tcf of
technically recoverable shale gas resources located along the onshore areas of
the Gulf of Mexico. Mexico is believed to have the second largest shale gas
reserves in Latin America behind only Argentina. The U.S. EIA estimates that
the Burgos Basin, which extends from southern Texas to northern Mexico, holds
most of the country’s shale gas reserves with about 343 Tcf of technically
recoverable shale gas resources. Other basins located in southern Mexico may
contain potential resources, including the Sabinas Basin, the Tampico Basin,
the Tuxpan Platform and the Veracruz Basin; however, production testing has not
yet occurred in those basins.

Mexico
is no stranger to shale gas development as Pemex – a state-owned petroleum
company that formerly was the exclusive operator for all petroleum activities
in Mexico – drilled up to six shale oil and gas exploration wells in the Burgos
and Sabinas Basins in 2011 and 2012. Pemex also announced that it would plan on
drilling more wells in the Tampico and the Veracruz Basins as well as in the
Tuxpan Platform but further development has not yet been reported.

According
to the U.S. EIA,
“based on analogy with the Eagle Ford Shale in Texas, industry and ARI
considers the Eagle Ford Shale in the Burgos Basin to be Mexico’s top-ranked
shale prospect.” Production results from the wells in the Burgos Basin,
however, were not as expected when comparing them to the Eagle Ford Shale play
results, primarily due to the Mexican hydrocarbon industry’s lack of knowledge
relating to horizontal drilling and hydraulic fracturing technologies.

Interestingly,
the U.S. EIA also noted that “Mexico’s
potential development of its shale gas and shale oil resources could be
constrained by several factors, including potential limits on upstream investment,
the nascent capabilities of the local shale service sector, and public security
concerns in many shale areas.” As shale gas exploration and production
activities, however, are of significant interest for Mexico’s economic
development, the Mexican Federal Congress passed a constitutional amendment on
December 20, 2013, opening Mexico’s energy market to competition as well as
attracting private and foreign investment and participation. On August 11,
2014, the Congress signed a Decree to reform and add new legislation in line
with the Constitutional amendments. The 2014 Decree contains, among other
things, a revised hydrocarbon taxation system and addresses environmental and
emerging social issues related to hydrocarbon exploration and development.

Following
the constitutional reform, the Mexican Secretary of Energy assigned petroleum
exploration and extraction blocks to Pemex during licensing “Round Zero” covering
nearly 90,000 square kilometers in order to maintain and expand Pemex
production activities. The Secretary of Energy provided Pemex with a five-year
period to develop the area; otherwise, the company could lose its exploration
and development rights to the area. The Mexican government also planned to
conduct five rounds of licensing bids open to foreign investors from 2015 to
2019. The Mexican National Hydrocarbons Commission (CNH) concluded the first
licensing round in January 2017 with a total of 39 awarded contracts.

The
Commission considered carrying out auctions for shale gas fields in final part
of Round One; however, this project has never matured due largely to falling
oil prices. The CNH stated that “even though an unconventional tender was
included in Mexico’s five-year energy plan, it is ‘on stand-by’ until [further] regulations are in
place,” according to a media report.
The CNH launched the second licensing round in the summer 2016.

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The Center for Agricultural and Shale Law (CASL) provides information and educational programs on agricultural and shale law and policy for producers and agribusinesses, attorneys, government officials, and the general public. The Center does not provide legal advice, nor is its work intended to be a substitute for such advice and counsel.